Abstract

Using a general equilibrium model with heterogeneous firms, where production requires both low and high skills and workers are immobile across sectors and skills, it is found that the endogenous shifts in aggregate productivity and the reallocation of workers among the mix of integrated and offshoring firms can increase the unskilled real wage. Simulations show that offshoring 0.5% of unskilled jobs, the extent of offshoring around 2002, could have actually spelled about 0.3% rise in the unskilled real wage. However, offshoring contributes to a skill gap that widens with the lowering of offshoring costs.